Farm Program Payments And “Flexible Leases”

Many farm management advisors and university experts have been advising farm operators to look at negotiating flexible cash rental leases with their landlords as an alternative to paying very high straight-out cash rental rates on rented land. This strategy seems to make a lot of sense, given the high volatility in the current grain markets, and the high degree of uncertainty relative to future crop revenues.

However, it appears that USDA and the Farm Service Agency (FSA) will likely view most flexible cash lease agreements the same as a share rental agreement, rather than as a cash rental agreement.FSA views any rental agreement that bases final land rent on the actual quantity of crop produced or the price received as a share rental agreement. This means that under most flexible cash lease agreements the landlord would be entitled to a portion of DCP direct and potential counter-cyclical (CCP) payments, which is similar to a share rental agreement. The landlord would also have to meet all FSA requirements to qualify for receiving DCP payments. In a typical cash rental lease, all DCP direct payments and CCPs go directly to the producer.

Many simplified flexible lease agreements simply state that “the farm operator will pay the landlord and additional amount of cash rent if the actual crop yield and/or price exceed a certain level.” (Example: Base cash rent is $130/acre and farm operator will pay an additional $40/acre rent if the corn yield exceed 170 bu./acre, or the corn price exceeds $4/bu. local price.) FSA is likely to view this type of flexible lease as a type of share rental agreement, thus making the landlord eligible for a portion of potential DCP payments. FSA will likely use some type of formula based on established yields (APH or proven average) times a set crop price to determine a likely crop value, minus typical cash crop expenses per acre (excluding land rental costs), to determine an estimated return per acre. In a flexible lease, the landlord would likely be entitled to a share of that amount.

Before a producer enters into a flexible cash lease agreement, it’s probably a good idea to discuss this agreement with the local county FSA director to see what effects this agreement would have on potential DCP payments, and if necessary, what the requirements would be for the landlord to qualify for a portion of the DCP payments. It’s better to check these things out in advance, rather than have them show up later in an FSA payment audit. The penalties for “knowingly and willfully” violating FSA rules is ineligibility for FSA programs, plus repayment of all past DCP payments plus penalties. This would be a very difficult penalty for many farm operators to deal with.

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.